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Business Valuation, Accounting, and Litigation Support

Other Valuation Services

Business Valuation Services

Corporate Buy-Outs

Business valuations are often performed in connection with the purchase or sale of all or part of a business. The reason is simple. The seller or buyer seeks professional, independent advice to assist in determining a selling price or offer to purchase.

Whenever a group of assets is purchased, the purchase price must be allocated among the various assets under Internal Revenue Code Section 1060. As a result, the buyer and seller must agree on a uniform allocation of the purchase and sales price.

The Tax Reform Act of 1986 requires the seller and purchaser to report the allocation on a form attached to the income tax returns for the year of sale. The Internal Revenue Service scrutinizes business sales and purchases to determine whether the parties treated the transaction in a reasonable and consistent manner. If there is a problem with the valuation, a taxpayer could be faced with an increased tax liability, penalties and interest.

Eminent Domain

Eminent domain involves a takeover of property by the government through the exercise of its legal rights. The government entity must compensate the property owner for the loss of value resulting from this legal action. Business valuators are qualified to calculate the difference between the value of the enterprise immediately before and after the takeover event. The valuation consultant may either support the government's position or the business owner's claim. In any event, the valuator must arrive at a conclusion in an independent, unbiased manner.

Bankruptcy

Solvency and insolvency analyses involve the valuation consultant's financial forecasting knowledge and capabilities. A solvency analysis may be performed in an acquisition transaction as the result of a loan covenant by a lending institution or intermediary. The valuator will be asked to confirm that:

  • The value of the assets exceeds the value of the liabilities after the transaction is completed;
  • The debtor is sufficiently capitalized to allow the enterprise to operate on an ongoing basis after the transaction is completed; and
  • The firm will be able to meet its existing obligations as they become due in the ordinary course of business.

Insolvency analyses are performed in bankruptcy, refinancing and reorganization work. The preparation and analysis of a business workout plan is an example of a valued service in this area. A business valuation, sometimes primarily from a liquidation perspective, is required in these cases.

Management Information Services

Transaction structuring and management information services are designed to assist management in achieving a predetermined goal or plan for the business. As such, they are concerned with issues of a strategic business nature. For example, if an enterprise has a goal of acquiring target companies which can add a minimum of 25 percent per year in pre-tax income to the profit and loss statement, a valuator can prepare a forecast as part of an overall business valuation to determine whether a proposed acquisition candidate is acceptable. Another situation involves the transaction structure, that is, how best to structure the terms and conditions of an acquisition. These services illustrate ways business valuation consultants advise clients regarding issues of strategic importance.

Lender Analysis

A business valuation sometimes supplies a lender with information sufficient to enable a loan to be secured by assets of the business. Historical cost is the method of valuation for financial statement purposes and, because of this, an appraisal of the business at fair market or investment value may result in a more favorable valuation. In some cases, assets of the business have intangible values, such as goodwill, trademarks, patents, and customer lists. These are often not reflected on historical cost financial statements. Additionally, fixed assets and intangible assets may be undervalued.

Corporate Recapitalizations

Restructuring the capital of a closely held business, or recapitalization, addresses business liquidity and succession issues. Recapitalization may enhance cash flow and maximize wealth. It may also minimize taxes on future business appreciation. Estate tax liability from future appreciation is generally "frozen" or limited by a recapitalization.

When an individual's investment in a business grows in value beyond that necessary for lifetime support, recapitalization may provide a method to transfer future valuation growth to children, grandchildren or others. A company's recapitalization for estate planning purposes involves the creation of a second class of stock or exchanging stock for a note. The goal of recapitalization is to transfer the value associated with certain stock away from the stock held in the estate.

Recapitalization may also be used to protect assets from creditors and may have benefits for owners from countries without comprehensive tax treaties with the United States.

The valuation component of a recapitalization is critical to appropriately structure the transaction. A complete understanding of the company's value and the rights associated with different classes of stock and debt is imperative to ensure that equivalent value is transferred.

Because of the potential for abuse, the IRS will likely scrutinize a recapitalization, and specifically, the valuation. An appropriate valuation must be well documented, unbiased and supportable.

Financial and Tax Reporting

Many financial and tax reporting circumstances require qualified, independent valuation services. When a company goes public, issues stock options or transfers or sells equity interests, a valuation is required for reporting purposes. C. P. Schumann & Co., P.C.'s professionals are experienced in identifying those circumstances and recommending appropriate valuation services such as:

  • Financial instrument valuation - when a company issues stock options or other financial instruments such as convertible preferred stock, the instruments must be valued so that the company can accurately report related compensation expense and the recipients can accurately report income.
  • Intangible asset valuation - If a company takes advantage of tax laws that allow it to claim a deduction related to the value of intangible assets. Those assets, such as patents, trademarks and trade names must be valued by an independent professional.
  • Closely held business interest valuation - A company must properly report the value of nonpublic company equity interests when acquiring, divesting or transferring those interests.
  • Partnership interest valuation - When a partnership is formed to effectively manage a family's assets, partnership interests must be valued for tax reporting purposes.
  • Net operating loss carry forward valuation - A company can utilize NOLs to reduce taxable income on a post-acquisition basis.

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